The Case for a Federal Corporate Charter Revocation … The Case for a Federal Corporate Charter...

NOTE

The Case for a Federal Corporate CharterRevocation Penalty

Kyle Noonan*

ABSTRACT

Though American corporations are creations of state law, the federalgovernment predominantly regulates their behavior. This mismatch helps ex-plain both the inadequate deterrence that the current system of criminal sanc-tions imposes on corporations as well as the unmet social need for retribution.This Note argues that Congress should authorize a federal corporate charterrevocation penalty for corporations that are repeatedly convicted of certaincrimes. Congress, exercising its power to preempt states from fields in whichthe states and Congress share authority, could authorize federal courts to im-pose such a penalty. Charter revocation would improve both general and spe-cific deterrence against corporate crime and better meet the public’s need forretribution. Congress should apply the charter revocation penalties to the typeof morally laden, socially damaging crimes that meet the U.S. SentencingCommission’s factors for increasing the severity of a sentence. The charterrevocation penalty should be structured to protect innocent parties, such asemployees, while preventing the morally culpable, such as officers and direc-tors, from reconstituting the condemned corporation.

* J.D., expected May 2012, The George Washington University Law School; B.A., 2005,University of Connecticut. I would like to thank Peter J. Smith, Kim Sikora Panza, and DanShedd for their insightful feedback on this Note.

February 2012 Vol. 80 No. 2

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2012] FEDERAL CORPORATE CHARTER REVOCATION 603

TABLE OF CONTENTS

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 603I. A BRIEF HISTORY OF THE CORPORATE FORM IN THE

UNITED STATES AND THE DEVELOPMENT OF

CORPORATE CRIMINAL SANCTIONS . . . . . . . . . . . . . . . . . . . . . 608A. State Incorporation and the Race to the Bottom . . . . . 608B. The Rise of Federal Corporate Criminal and

Civil Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 611II. WHY CURRENT SANCTIONS DO NOT PROVIDE

ADEQUATE DETERRENCE OR RETRIBUTION AND

PUNISH INNOCENT PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 614A. Inadequate Deterrence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 614

1. State Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6142. Federal Level . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616

B. Inadequate Retribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 618III. PROPOSAL: CHARTER REVOCATION PENALTY FOR

REPEAT CRIMINAL OFFENDERS . . . . . . . . . . . . . . . . . . . . . . . . . 620A. How Congress Should Impose

Charter Revocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 621B. When to Revoke a Charter . . . . . . . . . . . . . . . . . . . . . . . . . . 623

1. Repeated Convictions . . . . . . . . . . . . . . . . . . . . . . . . . . 6242. Serious Crimes with Moral Content . . . . . . . . . . . . 625

C. Why Charter Revocation? . . . . . . . . . . . . . . . . . . . . . . . . . . . 626D. Winding Down Corporations that

Are Dechartered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 628E. Example of Appropriate Charter Revocation . . . . . . . . 630

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 631

INTRODUCTION

In 2005, an explosion at an oil refinery owned by BP-NorthAmerica (“BP-NA”) in Texas City, Texas, killed fifteen people andinjured hundreds more.1 The U.S. Chemical Safety and Hazard Inves-tigation Board investigated and implicated organizational and safetydeficiencies extending from the refinery’s management all the way toBP’s corporate boardroom in London.2 The company was fined $50million for a felony violation of the Clean Air Act3 and was later as-

1 Richard Mauer & Anna M. Tinsley, Gulf Oil Spill: BP Has a Long Record of Legal,Ethical Violations, MCCLATCHY (May 8, 2010), http://www.mcclatchydc.com/2010/05/08/93779/bp-has-a-long-record-of-legal.html.

2 Id.3 Clean Air Act, 42 U.S.C. §§ 7401–7515 (2006).

604 THE GEORGE WASHINGTON LAW REVIEW [Vol. 80:602

sessed $87 million more in fines by the Occupational Safety andHealth Administration for 270 previously cited and still-unfixed safetyviolations, and 439 new violations.4

The next year, after BP had received warnings about corrodedpipes, a badly corroded and improperly maintained pipeline in Alaskaowned by BP spilled 200,000 gallons of oil on the tundra, the worst oilspill ever on the North Slope.5 Only five months later, another BPpipeline riddled with corrosion broke open, spilling even more oil onthe tundra.6 BP pled guilty to a misdemeanor violation of the CleanWater Act7 and paid $20 million in fines.8 Though congressional hear-ings revealed that BP employees throughout the company faced retali-ation for reporting problems, a BP vice president told a federal courtthat BP had learned its lesson.9

Just three years later, however, with BP still on criminal proba-tion,10 yet another BP pipeline owned by another BP subsidiary ex-ploded in Alaska, spilling 46,000 gallons of water and oil onto theNorth Slope and prompting yet another criminal probe.11 Meanwhile,in 2007, BP-NA admitted that its traders cornered the American mar-ket for propane shipped by pipeline from Texas.12 BP agreed to paymore than $300 million in restitution and civil and criminal penalties.13

Most recently, in April 2010, the Deepwater Horizon, an offshoreoil rig leased and operated by BP near Louisiana, exploded and sank,killing eleven workers14 and precipitating the largest marine oil spill in

4 Mauer & Tinsley, supra note 1.5 Id.

6 Id.7 Clean Water Act, 33 U.S.C. §§ 1251–1376 (2006).8 Mauer & Tinsley, supra note 1.9 Id.

10 Monica Hatcher, BP Gets a Break over Its 2005 Case, HOUS. CHRON., Sept. 27, 2010, atB8. Any corporation may be sentenced to a term of probation at the court’s discretion. 18U.S.C. § 3561(a) (2006); U.S. SENTENCING GUIDELINES MANUAL § 8D1.1 (2010). A term ofcriminal probation is required for convicted corporations that do not pay a fine. 18 U.S.C.§ 3551(c).

11 Mauer & Tinsley, supra note 1.12 Under a deferred prosecution agreement with the Justice Department, BP-NA admitted

that its traders illegally cornered the market for February 2004 TET propane—propane shippedfrom Texas to the Midwest and Northeast via the Texas Eastern Products Pipeline. CORPORATE

FRAUD TASK FORCE, REPORT TO THE PRESIDENT 1.3–.4 (2008), available at http://www.justice.gov/archive/dag/cftf/corporate-fraud2008.pdf.

13 Id.14 Leslie Kaufman, Search Ends for 11 Oil Rig Workers, but Spill Seems Contained for

Now, N.Y. TIMES, Apr. 24, 2010, at A8.


world history.15 The ecological injury to the Gulf of Mexico will likelytake decades to heal.16 Though the criminal investigation is still ongo-ing,17 reports that, for example, there were shortcomings in the welldesign18 and that the blowout preventer was installed on a test piperather than on the actual well19 suggest that BP may be criminally neg-ligent under the Clean Water Act for the resulting pollution.20

These are only the most severe illegal activities in which BP enti-ties have been caught engaging over the recent past.21 The ongoingand serious nature of BP’s criminal activity suggests that the criminalsanctions applied against it are failing to deter criminal activity by thecompany, activity that has killed dozens of people and created ecolog-ical catastrophes.22 At the same time, however, the fines and penaltiesagainst BP are some of the largest of their kind in history;23 arguablyBP is not getting an easy ride from prosecutors.

The BP experience highlights deep structural problems in theAmerican system of corporate criminal liability. BP-NA is incorpo-rated in Maryland and is one of thirteen domestic subsidiaries of BP,the global energy giant based in the United Kingdom.24 Though BP-NA is legally a creature of the State of Maryland, commentators havenot suggested an enforcement role for Maryland in the wake of BP’smisbehavior, or an enforcement role for the states in which other BPsubsidiaries are incorporated. Maryland, for its part, has no seriousincentive to punish its creation: the damage occurred far away, andany serious attempt by Maryland to hold BP accountable would al-

15 Campbell Robertson & Clifford Krauss, Gulf Spill Is the Largest of Its Kind, ScientistsSay, N.Y. TIMES, Aug. 3, 2010, at A14.

16 See Justin Gillis & Leslie Kaufman, The Corrosive Legacy of Oil Spills: Hidden Dam-ages to Environment Can Last Long After a Cleanup, N.Y. TIMES, July 18, 2010, at A1.

17 See Press Release, United States Dep’t of Justice, Attorney General Eric Holder onGulf Oil Spill (June 1, 2010), available at http://www.justice.gov/ag/speeches/2010/ag-speech-100601.html.

18 Clifford Krauss & Henry Fountain, Report on Oil Spill Pinpoints Failure of BlowoutPreventer: Finding Could Prompt Changes in Fail-Safe Devices, N.Y. TIMES, Mar. 24, 2011, atA18.

19 Oil Spill: Safety Valve Was Wrongly Plumbed on Rig, Says BP Executive, TELEGRAPH

(Aug. 25, 2010, 10:17 PM), http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/7964890/Oil-spill-safety-valve-was-wrongly-plumbed-on-rig-says-BP-executive.html.

20 See 33 U.S.C. § 1319(c)(1)(B) (2006).21 See CORPORATE FRAUD TASK FORCE, supra note 12, at 1.3–.4; see also BP p.l.c., Annual

Report (Form 20-F) 130–33 (Mar. 2, 2011) (discussing recent legal proceedings against BP).22 See supra notes 1, 12, 14.23 See Mauer & Tinsley, supra note 1 (citing OSHA fine of $87 million for violations relat-

ing to refinery accident as largest in the agency’s history).24 See Eastling v. BP Prods. N. Am., Inc., 578 F.3d 831, 831 (8th Cir. 2009); BP p.l.c., supra

note 21, at 220.


most surely result solely in lost revenue for Maryland as BP reincor-porated in another, friendlier, state. Nor, for their part, have Alaska,Texas, or Louisiana moved to revoke BP’s license to conduct businessin their states.25

The reality today is that prosecution of egregious criminal behav-ior committed by corporations—behavior resulting, for example, inpreventable deaths, property destruction, and environmental devasta-tion—is handled largely at the federal, rather than state, level.26 Thesystematic failure of federal law enforcement to adequately addresscorporate crime, of which BP provides an illustrative recent example,is rooted in part in the disconnect between the dominance of federalcriminal law and the state-based existence of most corporations.

This Note argues that, to remedy this issue, Congress should givefederal prosecutors the authority to revoke a state-granted corporatecharter as punishment for federal crimes. There are three central rea-sons for making charter revocation available as a federal penalty.First, such a change would improve deterrence. Giving federal prose-cutors this existential power27 over corporations would improve deter-rence by preventing fines from becoming a cost of doing business forcorporations. In BP-NA’s case, repeated penalties of tens of millionsof dollars28 appear to have failed to send a strong enough signal to thecompany to force a change in its behavior.

Second, federal charter revocation better meets the criminal jus-tice goal of retribution. Although an individual can be imprisoned forcriminal acts, a corporation has “no soul to be damned, and no bodyto be kicked,”29 making monetary penalties the most commonly ap-plied federal criminal sanction.30 Corporate fines and restitution can

25 In fact, federal prosecutors decided against even revoking BP’s criminal probation re-sulting from the Texas City disaster despite BP’s failure to make mandated safety upgrades.Hatcher, supra note 10.

26 See infra Part II.27 This is the legal equivalent to the power of the federal government to execute a human

being under 18 U.S.C. §§ 3591–3593 (2006). The application of the death penalty to humans isnot the subject of this Note. The point is merely that although federal courts have statutory andconstitutional authority to execute a human being, they have no equivalent power over a corpo-ration or other artificial person (though federal courts may indirectly terminate a corporation’sexistence by divesting it of its assets under U.S SENTENCING GUIDELINES MANUAL § 8C1.1(2004)). 18 U.S.C. §§ 3591–3593; Gregg v. Georgia, 428 U.S. 153, 207 (1976).

28 See supra notes 1, 12.29 John C. Coffee, Jr., “No Soul to Damn: No Body to Kick”: An Unscandalized Inquiry

into the Problem of Corporate Punishment, 79 MICH. L. REV. 386, 386 (1981) (emphasis andinternal quotation marks omitted).

30 See U.S. SENTENCING COMM’N, TABLE 51: ORGANIZATIONS RECEIVING FINES OR RES-

TITUTION BY PRIMARY OFFENSE CATEGORY AND APPLICABILITY OF CHAPTER EIGHT FINE


often be passed along to consumers,31 and frequently leave the corpo-ration fundamentally unchanged from before the penalty was levied,32

leaving the public need for retribution against the bad actor unmet.33

Providing a meaningful way to end a corporation’s existence as pun-ishment for serious criminal behavior meets the public’s need for ret-ribution far better than the current system.

Third, corporate charter revocation goes to the integrity of thelaw itself. Incorporation is an affirmative grant of power issued by astate.34 In other words, a corporation is a legal fiction35: it has no natu-ral existence, but instead exists because the law recognizes it.36 Theintegrity of the law is challenged when a state’s own creation flauntsthe very system that created it. The affirmative blessing of incorpora-tion cannot possibly mean that other laws, such as those regulatingcriminal conduct, must give way. Thus, revocation of charters for cor-porations that have shown themselves to be incapable of complyingwith the law protects the integrity of law itself.

This Note begins with a brief history of the corporate form in theUnited States and the evolution of corporations from local, public-oriented entities chartered by state legislatures to enormous multina-tional organizations whose legal existence is a matter of rote adminis-tration by a state agency. This Part also describes the development ofcorporate criminal liability. Part II illustrates why the current systemfails to provide adequate deterrence or retribution for corporate mis-conduct. It also explains why current legal mechanisms to end a cor-poration’s existence—including charter revocation by state attorneysgeneral, fines equal to the corporation’s assets after designation as acriminal purpose organization, and debarment from federal con-tracting—each fail to meet these needs or have disqualifying problems

GUIDELINES: FISCAL YEAR 2009 (2009), available at http://www.ussc.gov/Data_and_Statistics/Annual_Reports_and_Sourcebooks/2009/Table51.pdf.

31 See Mary Kreiner Ramirez, The Science Fiction of Corporate Criminal Liability: Con-taining the Machine Through the Corporate Death Penalty, 47 ARIZ. L. REV. 933, 993 (2005).

32 See, e.g., supra text accompanying notes 1–19 (describing BP’s continued criminal be-havior despite frequent federal fines).

33 For analysis of the importance of retribution to criminal corporate behavior, see ReginaA. Robson, Crime and Punishment: Rehabilitating Retribution as a Justification for Organiza-tional Criminal Liability, 47 AM. BUS. L.J. 109 (2010). For a description of public outrage in thewake of the Deepwater Horizon disaster, see Kristin Jensen & Jim Snyder, As Outrage Grows,So Does BP’s Adviser Crew, BLOOMBERG BUSINESSWEEK (June 17, 2010, 5:00 PM), http://www.businessweek.com/magazine/content/10_26/b4184030288892.htm.

34 See generally Trs. of Dartmouth Coll. v. Woodward, 17 U.S. (4 Wheat.) 518 (1819).35 See Note, Constitutional Rights of the Corporate Person, 91 YALE L.J. 1641, 1645 (1982).36 Id.


of their own. Part III details the legislation that Congress should passto authorize federal prosecutors to revoke a state-granted corporatecharter and discusses the situations in which courts should apply suchpunishment.

I. A BRIEF HISTORY OF THE CORPORATE FORM IN THE UNITED

STATES AND THE DEVELOPMENT OF CORPORATE

CRIMINAL SANCTIONS

A corporation is an unnatural person, a collection of individualsand assets that the law grants personhood.37 Although the modernbusiness corporation is a major feature of American life, it is relativelynew to the American legal system.

A. State Incorporation and the Race to the Bottom

At the time of the ratification of the Constitution, the colonieshad collectively chartered only twenty-one business corporations.38

The vast majority of these corporations served as quasi-public institu-tions, meeting a specific and narrowly defined public need defined bythe legislation that chartered them.39 The corporation allowed legisla-tures to attract capital for public purposes like bridges and canals byoffering benefits such as limited liability.40 States retained tight con-trol over these early corporations, revising or amending their chartersat will.41 The vast majority of profitmaking businesses in the UnitedStates at its founding were sole proprietorships or general partner-ships.42 Although Congress was thought to have a general incorpora-tion power early in the Republic’s history, and in fact used that powerto charter the Bank of the United States in 1791, political oppositionto the Bank and to federal incorporation generally resulted in rare use

37 See generally Peter J. Henning, The Conundrum of Corporate Criminal Liability: Seek-ing a Consistent Approach to the Constitutional Rights of Corporations in Criminal Prosecutions,63 TENN. L. REV. 793 (1996).

38 Daniel A. Crane, Antitrust Antifederalism, 96 CALIF. L. REV. 1, 6 (2008).39 John S. Baker, Jr., Reforming Corporations Through Threats of Federal Prosecution, 89

CORNELL L. REV. 310, 339 (2004).40 Katie J. Thoennes, Comment, Frankenstein Incorporated: The Rise of Corporate Power

and Personhood in the United States, 28 HAMLINE L. REV. 203, 206 (2004).41 Id.; see also Melvin I. Urofsky, Proposed Federal Incorporation in the Progressive Era,

26 AM. J. LEGAL HIST. 160, 161 (1982) (discussing states’ strict rules concerning corporateactivities).

42 Crane, supra note 38, at 6.


of this power.43 By the early twentieth century, incorporation wasfirmly rooted in the realm of state, rather than federal, law.44

Throughout the nineteenth and early twentieth centuries, statesrevoked or modified corporate charters when legislatures determinedthat these state creatures were not acting in the public interest.45 Inaddition, courts strictly construed the limited and specific powersstated in most charters.46 Slowly, however, the nature of corporationschanged, as did the relationship between corporations and their par-ent states. For example, though state charters limited most corpora-tions to a single line of business before the Civil War, legislaturesbegan to relax their incorporation statutes during the rapid industriali-zation of the late nineteenth century for the purpose of attracting cor-porations to their states.47 By attracting corporations to incorporatewithin their state, legislators could gain substantial revenue for theirstate governments through corporate filing fees and franchise taxes.48

States soon began to compete for incorporations by offering vari-ous legal incentives, including, for example, granting charters for anylegal purpose whatsoever, eliminating requirements that directors bestate residents, allowing unlimited capitalization, and ending publicdisclosure of annual reports.49 New Jersey dramatically liberalized itsincorporation statute in 1891, and within ten years ninety-five percentof the Nation’s large corporations were incorporated there, earningNew Jersey the nickname “the traitor state.”50 New Jersey, however,was quickly toppled by Delaware, which liberalized its incorporationstatute not long after New Jersey.51 In 1913, New Jersey, respondingto political pressure from the Progressive movement, amended its in-corporation law to be much more restrictive, giving Delaware the

43 Id. at 11.44 Id.45 See Thoennes, supra note 40, at 223 & n.127. At the time, corporations could not be

liable for crimes, for as unnatural persons, they could not possess the mens rea necessary for acriminal act. See Robson, supra note 33, at 111, 114. This was before both the development ofstrict liability crimes and the application of criminal liability to corporations, discussed infra PartI.B.

46 Gregory A. Mark, Comment, The Personification of the Business Corporation in Ameri-can Law, 54 U. CHI. L. REV. 1441, 1444 (1987).

47 Crane, supra note 38, at 12.48 For example, corporate filing fees and franchise taxes provided sixty percent of New

Jersey’s revenue in 1901, following liberalized incorporation requirements that attracted trusts tothe state. Id. at 12–13.

49 See id. at 12.50 Id. at 12–13.51 William L. Cary, Federalism and Corporate Law: Reflections upon Delaware, 83 YALE

L.J. 663, 664 (1974).


edge.52 Delaware’s dominance has continued to grow since then sothat today Delaware captures eighty-five percent of the incorpora-tions of firms that shop for jurisdictions in which to incorporate.53

Though the annual taxes of each firm incorporated in Delaware areno more than $150,000,54 revenues from corporate licenses, in the ag-gregate, provide more than $750 million to the small state.55

Today, corporate status is granted by state administrative agen-cies with delegated authority rather than by legislatures, with very fewrequirements and for virtually any purpose.56 In fact, a recent surveyof state incorporation statutes found that none of the fifty state stat-utes require a corporation to comply with state or federal law, beyondthe routine reporting requirements of the incorporation statute itself,to maintain its incorporation.57

Though incorporation today is a routine administrative process,states retain broad powers to revoke corporate charters, should theychoose to exercise them. All fifty states have quo warranto statuteswith strong language allowing public officials such as the AttorneyGeneral (or, in some cases, private citizens58) to seek charter revoca-tion for abuse or misuse of chartered powers,59 yet these statutes arevirtually never used today.60 This is unsurprising, as an attorney gen-eral has strong incentives not to police behavior of corporationschartered in his state because the effects of corporate misbehavior arelikely to occur outside of the state. Corporations are frequently tax-payers and employers, and are represented by lawyers and lobbyists.

52 Id.53 Lucian Arye Bebchuk & Assaf Hamdani, Vigorous Race or Leisurely Walk: Reconsider-

ing the Competition over Corporate Charters, 112 YALE L.J. 553, 555–56 (2002). Clearly thereare other factors that lead corporations to incorporate in Delaware, such as a sophisticated courtsystem for handling corporate disputes. Id. at 557. The point is that Delaware successfully com-peted for incorporations and has strong incentives not to drive corporations away by aggressivelyprosecuting them.

54 Id.55 State Government Tax Collections: 2010 State: Delaware, U.S. CENSUS BUREAU, http://

www.census.gov/govs/statetax/1008destax.html (last updated Mar. 15, 2011).56 Mitchell F. Crusto, Green Business: Should We Revoke Corporate Charters for Environ-

mental Violations?, 63 LA. L. REV. 175, 186 (2003).57 Id.58 Alabama, for instance, allows private citizens to file charter revocation lawsuits directly.

ALA. CODE § 6-6-591(a)(1) (LexisNexis 2005).59 For example, many states allow charter revocation for antitrust penalties. See, e.g.,

Kathleen Foote, State Antitrust Enforcement, in 48TH ANNUAL ANTITRUST INSTITUTE 795, 803(PLI Corporate Law & Practice, Course Handbook Ser. No. 1603, 2007) (citing CAL. BUS. &PROF. CODE § 16753 (Deering 2007); 740 ILL. COMP. STAT. ANN. 10/7(1), (3) (West 2006);WASH. REV. CODE ANN. § 19.86.150 (LexisNexis 2001)).

60 Crusto, supra note 56, at 190–91.


Regardless of whether corporations are criminal or law-abiding, theyare likely to wield commensurate political power. State enforcementaction is unlikely to stop the misbehavior anyway because a corpora-tion can simply reincorporate in a friendlier state with a less aggres-sive attorney general and carry on as before. Hence, the “race to thebottom” effectively results in freeing corporations from meaningfulstate prosecution: another state, more desperate for the revenue fromthe incorporation than the state in which a criminal corporation is in-corporated, will provide a new home where the corporation canreincorporate without fear of prosecution.

These factors constitute the major underlying problem with a sys-tem of state incorporation: states have largely abdicated the field ofregulating corporate behavior and punishing corporate crime.61 In-deed, states have every reason to enforce as little as possible.62

B. The Rise of Federal Corporate Criminal and Civil Liability

As the states abdicated the field of policing corporate behavior,the federal government increasingly occupied the field.63 Over time,federal criminal and civil liability has almost completely replaced statepolicing of corporate behavior.64

At common law, corporations could not commit crimes.65 Duringthe late nineteenth century, this approach began to change. In 1886,the Supreme Court assumed in Santa Clara County v. Southern PacificRailroad Co.66 that a corporation was a legal “person” entitled to pro-tection under the Fourteenth Amendment.67 This radically expandeda corporation’s rights under the law, but also opened the door for acorporation to be subject to penalties that previously had been ap-plied only to “actual” people.68 Courts gradually extended liability to

61 See id. at 191 (citing personal communication by the author with Professor Robert W.Hamilton of the University of Texas Law School).

62 See Bebchuk & Hamdani, supra note 53, at 557.63 See Baker, supra note 39, at 340–41.64 See id.65 1 WILLIAM BLACKSTONE, COMMENTARIES *464. There were several barriers to corpo-

rate criminal liability, including the lack of a physical body, lack of mens rea, and the doctrine ofultra vires, which treated corporations as incapable of acting outside of their charter. See Rob-son, supra note 33, at 114.

66 Santa Clara Cnty. v. S. Pac. R.R. Co., 118 U.S. 394 (1886).67 Id. at 396 (indicating in a headnote approved by the Chief Justice that, as a preliminary

matter to addressing the merits of the case, the Court believed that the Fourteenth Amendmentapplies to corporations).

68 See Robson, supra note 33, at 114–15.


corporations for crimes of general intent,69 and then to crimes of spe-cific intent.70 In 1909, the Supreme Court exposed corporations to fullcriminal liability in New York Central & Hudson River Railroad Co. v.United States,71 where it upheld a railroad’s conviction for paying ille-gal “rebates” to its clients and noting that, without criminal liabilityfor corporations, many crimes would go unpunished.72 In the decadesafter New York Central, Congress, recognizing that some corporationshad grown more powerful than the states that chartered them, pro-ceeded to legislate “an unrelenting expansion of criminalization ofbusiness conduct.”73 Given that the nonhuman nature of corporationsprevents criminal punishments such as imprisonment and execution,there is little distinction between civil and criminal penalties for cor-porate misconduct.74

Today, corporations can face federal criminal sanctions for a largevariety of activities.75 Under the Organizational Sentencing Guide-lines, federal courts may impose a wide range of civil and criminalpenalties on corporate criminals,76 including restitution,77 public noticeof conviction,78 disgorgement of wrongly gained assets,79 and, mostfrequently, fines.80

69 See United States v. Van Schaick, 134 F. 592, 602 (C.C.S.D.N.Y. 1904).

70 United States v. MacAndrews & Forbes Co., 149 F. 823, 835–36 (C.C.S.D.N.Y. 1906).

71 N.Y. Cent. & Hudson River R.R. Co. v. United States, 212 U.S. 481 (1909).

72 Id. at 494–96.

73 Robson, supra note 33, at 116 (noting that corporations have been held criminally liablefor acts committed by low-level employees, acts committed though no individual has the requi-site mens rea, and when employee defendants have been acquitted).

74 Ramirez, supra note 31, at 943. Although many commentators have criticized the theo-retical underpinnings of corporate criminal liability, this liability has been part of the Americanlegal landscape for more than a century and shows no signs of retreat. Rather than address theseconcerns, this Note assumes that corporate criminal liability will remain a part of the legal land-scape for the foreseeable future.

75 U.S. SENTENCING GUIDELINES MANUAL ch. 8, introductory cmt. (2010) (“Organizationscan act only through agents and, under federal criminal law, generally are vicariously liable foroffenses committed by their agents.”). Hence, corporations can be liable for virtually any crimethat their agents can commit (except those requiring physical presence, such as rape and mur-der). V.S. Khanna, Corporate Criminal Liability: What Purpose Does It Serve?, 109 HARV. L.REV. 1477, 1488–89 (1996).

76 U.S. SENTENCING GUIDELINES ch. 8. Although the Sentencing Guidelines are advisoryrather than mandatory, a sentencing court must still consider the ranges set forth in the Guide-lines. United States v. Booker, 543 U.S. 220, 245 (2005).

77 U.S. SENTENCING GUIDELINES § 8B1.1.

78 Id. § 8D1.4(a).

79 Id. § 8C2.9.

80 See id. § 8B1.


The Sentencing Guidelines also provide for a “death penalty” fororganizations whose primary purpose is criminal.81 The Guidelinesimplement this death penalty by setting a fine “sufficient to divest theorganization of all its net assets.”82 This fine is designed to put thecorporation out of business by forcing the forfeiture of all of its assetsto the government. Although the corporation may continue to legallyexist, depletion of its assets closes the corporation down. The provi-sion does not typically apply to an ordinary, state-chartered, for-profitcorporation, however, as it may only be applied to organizations “op-erated primarily for a criminal purpose or primarily by criminalmeans.”83 In practice, the organizational death penalty is very rarelyapplied: only a few reported cases appear to have applied it, and thenonly to minor players.84

There are other, indirect ways that federal prosecutors and regu-lators can exercise existential control over corporations in specific cir-cumstances. The U.S. Department of Health and Human Services canexclude providers of health care supplies and services from con-tracting with the federal government on the basis of fraud, oftensounding the death knell for providers shut out of Medicare andMedicaid.85 Similar provisions apply to contractors working for theDepartment of Defense and other agencies.86 These statutes demon-strate that, although Congress has already empowered courts and fed-eral agencies to take actions that will ultimately destroy a corporationwhen it is warranted, more is needed to deter and punish corporatecrime.

81 Ramirez, supra note 31, at 944–45.82 U.S. SENTENCING GUIDELINES § 8C1.1.83 Id. (identifying as examples organizations established to illegally manufacture con-

trolled substances, and hazardous waste disposal companies lacking legitimate means to disposeof hazardous waste).

84 See Order Accepting Report and Recommendation of the United States MagistrateJudge Concerning Plea of Guilty, United States v. Alliance Pharmacy Servs. Inc., No. 3:05-CR-240-P, 2006 U.S. Dist. LEXIS 86475 (N.D. Tex. Nov. 30, 2006) (applying U.S. SENTENCING

GUIDELINES § 8C1.1 to dissolve a criminal corporation); see also Ramirez, supra note 31, at 945n.68 (stating that reported cases applying section 8C1.1 “are scarce”).

85 42 U.S.C. § 1320a-7(a)(1), (b)(7) (2006); see also Ramirez, supra note 31, at 949–50(stating that healthcare providers convicted of certain fraud-related crimes face a mandatoryrequirement of exclusion from participation in any federal healthcare program for a minimum ofthree years).

86 Ramirez, supra note 31, at 950–51.


II. WHY CURRENT SANCTIONS DO NOT PROVIDE ADEQUATE

DETERRENCE OR RETRIBUTION AND PUNISH

INNOCENT PARTIES

As described above, states charter corporations but the federalgovernment largely regulates and punishes them. This dichotomy hasexacerbated serious pathologies in both deterring corporate crime andin providing retribution when such crime occurs.87

States and the federal government punish corporations in variousways. States virtually never revoke corporate charters as punishmentfor criminal behavior.88 Restitution, imposed on roughly thirty per-cent of federally convicted organizations,89 serves purely utilitarianends: to make the wronged whole. That leaves fines as the punish-ment for the vast majority of corporate convicts.90 Yet the small num-ber of fines imposed—131 organizations received federal fines forcriminal acts in 2009—means that, whether intended for retributive ordeterrent purposes, the fines need to be enormous to compensate forthe small likelihood of being imposed.91 Yet the median fine in 2009was only $119,000,92 and because none of the fines was imposed on“criminal purpose organizations” (for which the fine level amounts toa death sentence), it is almost certain that none of the fines directlyputs a corporation out of business.

A. Inadequate Deterrence

The current system of deterring criminal punishment is systemati-cally impotent at both the state and federal levels, providing neitherappropriate specific, nor general, deterrence.93

1. State Level

When states do revoke corporate charters, it is generally for ig-noring legal formalities, such as failing to file annual reports, rather

87 See Crane, supra note 38, at 27–50, for an analysis of the general problems inherent instate corporate chartering in the antitrust context.

88 See infra Part II.A.1.89 U.S. SENTENCING COMM’N, supra note 30.90 Id.91 See Coffee, supra note 29 (describing “deterrence trap”).92 U.S. SENTENCING COMM’N, TABLE 52: MEAN AND MEDIAN FINE OR RESTITUTION IM-

POSED ON SENTENCED ORGANIZATIONS BY PRIMARY OFFENSE CATEGORY: FISCAL YEAR 2009(2009), available at http://www.ussc.gov/Data_and_Statistics/Annual_Reports_and_Sourcebooks/2009/Table52.pdf. The mean fine was substantially higher at $17 million, but this is largely due tothree outlier fines of more than $60 million. Id.

93 See Ramirez, supra note 31, at 962–72.


than as a penalty for criminal behavior.94 Florida, for example, re-voked the charters of fraudulent stock brokerage companies in the1990s that had defrauded investors of $81 million, but the charterswere revoked for filing technicalities rather than as explicit punish-ment for crimes committed.95 Similarly, in 1998, New York AttorneyGeneral Dennis Vacco very nearly revoked the charters of tobaccoindustry front groups that peddled junk science promoting tobaccouse.96 Further, the revoked charters in both Florida and New Yorkwere for fairly minor corporate players in the larger economy.97

States typically reserve charter revocation for smaller corporationswith fewer assets because these are more likely to forgo a legal for-mality that allows the state to revoke the charter on a technicality.98

This frees larger and wealthier corporations, which are more likely tohave legal counsel and comply with legal formalities, from fearing thatcriminal activity could result in losing their charters on a technicality.

In recent years, some legislatures have considered bills thatwould add teeth to a state’s revocation power, generally by aug-menting the state’s existing discretionary power with a mandatory ele-ment in certain situations. The Kentucky Senate passed legislation in1994 that would automatically revoke a corporation’s charter to dobusiness in Kentucky if employees were convicted of bribing publicofficials.99 Similarly, in 2003, a California state senator introduced theCorporate Three Strikes Act to prohibit repeat corporate offendersfrom incorporating or transacting business in California.100 However,neither bill became law.101

What about Delaware? The effectiveness of enforcement acrossall states can be judged largely by the performance of the legal infra-structure of the state home to most of America’s major corpora-tions.102 The Delaware Code provides for the attorney general’s filing

94 Crusto, supra note 56, at 189, 191.95 Charlie Cray, Chartering a New Course: Revoking Corporations’ Right to Exist, MUL-

TINATIONAL MONITOR, Oct.–Nov. 2002 at 8, 8–9.96 Id. at 9.97 Id. at 8 (noting that multinational corporate lawbreakers have not been subject to char-

ter revocation statutes).98 Id.99 David Kligman, Senate Approves Penalizing Firms when Workers Bribe Public Officials,

LEXINGTON HERALD-LEADER (Ky.), Jan. 25, 1994, at A11.100 S.B. 335, 2003 Leg., Reg. Sess. (Cal. 2003).101 A Westlaw search shows that they failed to become law.102 See Bebchuk & Hamdani, supra note 53, at 588; Daniel Gross, Listening to Delaware,

SLATE (Nov. 7, 2003, 5:52 PM), http://www.slate.com/id/2090984/ (Fifty-eight percent of Fortune500 companies are incorporated in Delaware).


for revocation of a corporate charter in the county Court of Chanceryfor “abuse, misuse or nonuse of its corporate powers, privileges orfranchises.”103 Though the Delaware Court of Chancery interpretedthis statute to allow revocation for “[c]ontinued serious criminal viola-tions by corporate agents,”104 the power to revoke appears to have notbeen invoked since the 1950s,105 and even then was invoked onlyagainst small local, nonprofit corporations for serving alcohol at pro-hibited times106 and for resisting desegregation.107 Delaware and otherstates fail to utilize their broad law enforcement power to revokecharters for any corporations, let alone major corporations that havecommitted serious misconduct.108 Because Delaware and other statesso often fail to use their powers to punish or destroy corporatecriminals, they fail to adequately deter corporate crime.

2. Federal Level

Though a bewildering array of federal laws criminalizes corporatebehavior,109 the regime has failed to deter disastrous corporate crimeover the past decade. From Enron and WorldCom110 to the lendingpractices that created the 2008 financial crisis111 and the recent im-proper foreclosure filings,112 corporate misconduct has recently oc-curred on a massive scale. This is not because the issue has escapedgovernment attention: President Bush set up a Corporate Fraud TaskForce within the Justice Department in 2002,113 and Congress re-sponded to the Enron, WorldCom, and other accounting scandals with

103 DEL. CODE ANN. tit 8, § 284(a) (West 2010).104 Craven v. Club Fourteen, Inc., No. CIV.A.1015, 1959 WL 59355, at *2 (Del. Ch. Mar. 4,

1959).105 This is evidenced by a “citing references” search on Westlaw for DEL. CODE ANN. tit. 8,

§ 284.106 Craven, 1959 WL 59355, at *2.107 See Young v. Nat’l Ass’n for Advancement of White People, Inc., 109 A.2d 29, 30 (Del.

Ch. 1954).108 See Cray, supra note 95, at 8.109 See Frank O. Bowman, III, The 2001 Federal Economic Crime Sentencing Reforms: An

Analysis and Legislative History, 35 IND. L. REV. 5, 17 (2001) (finding that the U.S. SentencingGuidelines contain “roughly 970” separate statutory provisions prescribing federal criminalpenalties).

110 The Banks that Robbed the World, BBC NEWS (June 9, 2004, 9:33 GMT), http://news.bbc.co.uk/2/hi/business/3086749.stm.

111 Richard B. Schmitt, FBI Saw Threat of Loan Crisis, L.A. TIMES, Aug. 25, 2008, at A1.112 David Streitfeld & Gretchen Morgensen, Foreclosure Furor Rises; Many Call for a

Freeze, N.Y. TIMES, Oct. 6, 2010, at B1.113 Exec. Order No. 13,271, 3 C.F.R. 245 (2003).


the Sarbanes-Oxley Act114 in 2002, dramatically strengthening ac-counting disclosure rules for corporations.115

Over the past decade, why has so much corporate crime contin-ued to occur even as federal criminal sanctions were strengthened?One likely reason is that the number of federal corporate criminalconvictions is strikingly low; in 2009, only 177 organizational defend-ants were sentenced under the Organizational Sentencing Guide-lines.116 This represents a decline of 30% from ten years earlier, when255 organizations were sentenced.117 Given that there were almost sixmillion business firms in the United States in 2008,118 177 convictionsis an astonishingly small number. This is especially true in light of anolder study of the 580 largest corporations in the United States, whichfound that over 60% had a federal civil or criminal enforcement ac-tion initiated against them in 1975 or 1976.119 Although it is difficultto obtain accurate data on uninvestigated corporate crime, given thenumerous examples of egregious criminal behavior by major corpora-tions over the last decade,120 it seems unlikely that fewer than 200 cor-porations break criminal statutes each year.

Because a corporation and its agents know that there is an ex-tremely small likelihood of being charged and convicted, a fine mustbe far larger than the expected gain to provide adequate deterrence.121

But shareholder limited liability ensures that once a fine exceeds thecorporation’s assets, the assets of the shareholders are out of reach, soany fine is limited in size to the corporation’s assets.122 Further, finesare often levied against the corporation itself rather than against di-

114 Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified as amended inscattered sections of 15 & 18 U.S.C.)

115 See Elisabeth Bumiller, Corporate Conduct: The President; Bush Signs Bill Aimed atFraud in Corporations, N.Y. TIMES, July 31, 2002, at A1.

116 U.S. SENTENCING COMM’N, supra note 30.117 U.S. SENTENCING COMM’N, OVERVIEW OF FEDERAL CRIMINAL CASES FISCAL YEAR

2009, at 10 (2010), available at http://www.ussc.gov/Research/Research_Publications/2010/20101230_FY09_Overview_Federal_Criminal_Cases.pdf.

118 U.S. CENSUS BUREAU, STATISTICS OF U.S. BUSINESSES, available at http://www.census.gov/econ/susb/ (2008 data showing number of business firms).

119 MARSHALL B. CLINARD ET AL., U.S. DEP’T OF JUSTICE, ILLEGAL CORPORATE BEHAV-

IOR, at xix–xx (1979). The 1975–1976 study looked at enforcement actions rather than convic-tions, making exact comparisons with recent statistics for Sentencing Commission convictionsdifficult.

120 See, e.g., supra notes 1, 10, 19 and accompanying text (describing BP’s criminal behav-ior); see also CORPORATE FRAUD TASK FORCE, supra note 21 (describing a wide variety of cor-porate criminal convictions in fiscal year 2009).

121 Coffee, supra note 29, at 389 (describing the “deterrence trap”).122 Id. at 390.


rectors and officers responsible for the illegal behavior.123 Hence apunishment levied against the corporation itself, especially wheremanagement cannot be directly implicated, fails to adequately deterdirectors and officers from engaging in or condoning illegal behaviorbecause the fines will be borne by the corporation (and thus essen-tially by the stockholders) rather than by management. Any reasona-ble solution needs to provide incentives to the people who can changethe corporation’s behavior—the directors and officers—to do so.These are fundamental problems that make a system of corporatesanctions based almost exclusively on monetary fines124 systematicallyimpotent and thus incapable of deterring corporate crime.

B. Inadequate Retribution

Not only does the current system fail to deter corporate crimeadequately, but it also fails to provide adequate retribution againstconvicted corporations.125 Unlike deterrence, which is generally utili-tarian in purpose, retributive punishment is based on the belief, bestknown through the writings of Immanuel Kant, that “society is moremorally just when the good prosper and the bad suffer.”126

Retribution has long been recognized as a central goal of Ameri-can criminal punishment.127 The American legal system, with itsgreater emphasis on individual responsibility than comparable legalsystems elsewhere,128 is comfortable with “unembarrassed condemna-tion where condemnation is warranted.”129 Though retributivism per-meates American criminal law, it is perhaps clearest in sentencing forcapital crimes, where the moral blameworthiness of the defendant isapparent.130 For example, in Booth v. Maryland,131 the Supreme Court

123 Unfortunately, the U.S. Sentencing Commission does not report whether any individualdefendants are sentenced alongside organizations for the same offenses. Particularly with largeand complex criminal indictments, however, plea agreements often involve large fines againstthe corporations without admission of fault by individual officers or directors. See, e.g., CORPO-

RATE FRAUD TASK FORCE, supra note 21.124 According to the U.S. Sentencing Commission, in 2009, nearly ninety percent of con-

victed organizations paid fines, made monetary restitution, or both, and eleven percent of con-victed organizations paid neither. See U.S. SENTENCING COMM’N, supra note 30, at 10–11.

125 For a general discussion of the theoretical underpinnings of organizational criminal lia-bility, see Robson, supra note 33, at 119–21.

126 Id. at 121 (internal quotation marks omitted).127 James Q. Whitman, A Plea Against Retributivism, 7 BUFF. CRIM. L. REV. 85, 87 (2003)

(describing the central role of retribution in American criminal punishment).128 Id. at 94–95.129 Id. at 87.130 See JEFFRIE G. MURPHY, Getting Even: The Role of the Victim, in RETRIBUTION RECON-

SIDERED 61, 80–81 (1992).


emphasized the personal blameworthiness of the defendant—ratherthan the impact on the victim—by finding the use of “victim impactstatements” in sentencing unconstitutional.132 The moral culpabilityof the defendant alone, according to the Booth Court, should deter-mine his punishment, to the exclusion of the effect of the defendant’sactions on his victim.133

Scholars have noted that retribution has increased in importancein recent decades, and this shift is reflected in policies such as “threestrikes” laws and increased prison sentences.134 Criminal liability forcorporations, however, ignores retributive goals, instead basing corpo-rate criminal sanctions primarily on deterrence through the use offines.135 Because fines are assessed as both criminal and civil penal-ties, especially for strict liability malum prohibitum offenses, and thusare frequently utilized as a deterrent, fines alone carry a weak retribu-tive sting.136 Because fines do not send a clear retributive signal, theydo not, on their own, meet retributive needs as fully as other punish-ments when levied in response to “deliberate actions that violate coresocietal values.”137 By restricting freedom, prison is the most obviousretributive punishment for a human convict.138

There is no principled basis for applying retributive sanctionsagainst individuals but not corporations.139 Because retributive sanc-tion requires only a culpable actor and conduct that is morally wrong,corporations are just as capable of receiving retributive punishment asnatural persons.140 Note that gross negligence that endangers livesand causes economic and environmental damage is itself morally rep-rehensible. Therefore, when BP chooses to ignore the huge risks itimposes on its employees and on society in its pursuit of the bottomline, the corporation is making a decision with a moral component.Furthermore, American law has treated corporations as natural per-

131 Booth v. Maryland, 482 U.S. 496 (1987), overruled by Payne v. Tennessee, 501 U.S. 808(1991).

132 Id. at 504–06.133 Id.134 Whitman, supra note 127, at 87, 90.135 U.S. SENTENCING COMM’N, supra note 30, at 11.136 See supra Part II.A.137 See Robson, supra note 33, at 124, 136–37.138 Prison obviously provides both specific and general deterrence as well.139 Corporations obviously cannot be put in prison, but, as this Note proposes, there are

others ways to restrict a corporation’s freedom.140 Robson, supra note 33, at 127. But see Khanna, supra note 75, at 1494 (asserting that

deterrence but not retribution is an appropriate goal for corporate criminal and civil sanctions).


sons for most purposes for over a century.141 Perhaps most important,the lack of a retributive sanction against corporations whose conductis commonly understood as morally wrong helps to reinforce the ideaof a “stacked deck”: the widespread public perception that corpora-tions exert undue influence over American society and politics, andare able to get away with criminal activity that natural persons can-not.142 Criminal law should punish corporations no less than humancriminals, with an eye not only to deterrence, but also to retribution.

Given the scope and magnitude of corporate crime perpetrated inthe United States in recent years, the public demand for retributionagainst corporate offenders is strong.143 Yet, current punishments forcorporate crime can hardly provide meaningful retributive sanctionagainst corporate criminals that engage in immoral activity includingrigging markets, polluting oceans, and precipitating a global financialcrisis. In the case of serial offenders like BP, a strong retributive needgoes unmet when the corporation receives fine after fine but contin-ues to engage in a pattern of unrelenting illegal behavior.144

III. PROPOSAL: CHARTER REVOCATION PENALTY FOR REPEAT

CRIMINAL OFFENDERS

The current system of corporate criminal sanctions fails to pro-vide adequate deterrence or to meet the public need for retribution.To fill gaps left by state underenforcement and inadequate federalsanctions, Congress should provide for revocation of state-grantedcorporate charters as punishment for corporations with a history ofrepeated, serious criminal violations. This Part first addresses themechanics of the proposed legislation and practical and constitutionalobjections to the proposal. Next, this Note describes the circum-stances under which this “corporate death penalty” should be applied.

141 See supra notes 69–70 (citing cases finding corporations liable for both specific and gen-eral intent crimes); see also supra note 67 (citing case stating corporations are legal persons forpurposes of the Fourteenth Amendment).

142 A 2010 survey found that only twenty-five percent of the public believed that largecorporations had a positive effect “on the way things are going.” PEW RESEARCH CTR. FOR THE

PEOPLE & THE PRESS, THE PEOPLE AND THEIR GOVERNMENT: DISTRUST, DISCONTENT, ANGER

AND PARTISAN RANCOR 7 (2010), available at http://people-press.org/files/legacy-pdf/606.pdf; seealso Aaron Bernstein, Too Much Corporate Power?, BUSINESSWEEK, Sept. 11, 2000, at 144,152–53 (describing widespread sense that corporations are failing to play by the rules).

143 Cf. Claudia H. Deutsch, New Surveys Show that Big Business Has a P.R. Problem, N.Y.TIMES, Dec. 9, 2005, at C1 (describing widespread public belief that big business operates withimpunity).

144 See supra notes 4–11 and accompanying text.


A. How Congress Should Impose Charter Revocation

As noted in Part I, corporate charters are issued by states, but lawenforcement against corporations by states is ineffective because cor-porations can simply reincorporate elsewhere and continue to do busi-ness in the states that revoked its charter.145 The most meaningful lawenforcement against corporations occurs at the federal level.146 Statesalready enjoy broad powers over their corporations, but they gener-ally choose not to exercise them.147 To serve as a meaningful penalty,the charter revocation legislation must come from Congress and mustbe applied by the federal courts regardless of which state granted aparticular incorporation.

Congress should pass charter revocation legislation to preemptstate action in fields in which both the state and federal governmentexercise jurisdiction.148 The legislation should empower the JusticeDepartment to request charter revocation as a penalty for corporateconvictions of the nature described below. The penalty should notcreate a new category of corporate crime; instead, it should simply bea new penalty that would apply under certain circumstances to convic-tions for violations of substantive criminal law.

The legislation should explicitly prohibit states from issuing (actu-ally, reissuing) a charter to the corporation receiving the sentence.This solution would simply preempt any state from regranting a char-ter to the corporation thus sentenced. Moreover, when multiple sub-sidiaries of a single corporate parent are involved, the corporateparent would be prohibited from reconstituting substantially the samecorporations that were convicted and dissolved. The corporationwould technically continue to exist until its charter is next up for re-newal. During this time, the corporation could be wound down in anorderly way, described in Section D below. When its charter expires,the corporation would necessarily cease to exist, as the state in whichit was chartered, along with every other state, would be preempted byCongress from issuing the corporation a new charter.

The statute should specify that, for a period of five to ten years,the directors of the condemned corporation could serve on the samecorporate board together only when they are a minority, ensuring thatthat set of directors would not form a majority of the board of another

145 See supra Part I.A.146 See supra Part I.B.147 See supra notes 58–62 and accompanying text.148 For a recent discussion of Congress’s preemption power, see Altria Grp., Inc. v. Good,

555 U.S. 70, 76–77 (2008).


corporation. Similarly, key senior officers should be prohibited fromworking together for five to ten years. In addition, no director or of-ficer could serve on the board or work for any corporation affiliatedwith the parent corporation of the convicted corporation. Courtsmust be empowered to issue injunctions to enforce these rules,preventing reconstitution of substantially the same corporation underanother name.

Critics may object that incorporation is a traditional state powerthat Congress is not free to preempt.149 In other words, the fact thatCongress has not exercised this power at any previous time, but thatstates exclusively have, implies that Congress lacks that power. Forexample, in Printz v. United States,150 the Court reasoned that the factthat Congress had never historically ordered state executive officialsto enforce federal law suggested that Congress lacked that power.151

The incorporation privilege has been exercised, however, by both thestates and Congress since the founding of the Republic.152 As de-scribed above, Congress chartered the Bank of the United States in1791,153 demonstrating an understanding that both Congress and thestates enjoyed the incorporation power. Furthermore, Congress haschartered other corporations, including the Boy Scouts of America in1916154 and Little League Baseball in 1964.155

Congress’s power in fields in which states and Congress share ju-risdiction—for example, over law enforcement and regulation of theeconomy—allows Congress to preempt state regulation if it sochooses.156 Congress has exercised this power broadly, preemptingboth specific state regulations157 and foreclosing the states from regu-lating an entire field.158 Even when Congress regulates in fields tradi-tionally occupied by the states, Congress’s purpose in passing the

149 As described in Part I above, corporate law is primarily state-based law and the incor-poration privilege has virtually always been exercised by states rather than Congress.

150 Printz v. United States, 521 U.S. 898 (1997).151 Id. at 907–08.152 See supra Part I.153 See Crane, supra note 38, at 11.154 36 U.S.C. § 30901 (2006).155 Id. § 130501.156 See U.S. CONST. art. VI, cl. 2 (Supremacy Clause).157 See Cipollone v. Liggett Grp., Inc., 505 U.S. 504, 530–31 (1992) (finding explicit preemp-

tion of a state common law tort claim by the Public Health Cigarette Smoking Act of 1969, butnot several other state law claims advanced by plaintiff).

158 See Gade v. Nat’l Solid Wastes Mgmt. Ass’n, 505 U.S. 88, 100, 102 (1992) (finding thatbecause Congress intended the Occupational Safety and Health Act of 1970 to provide uniformhealth and safety laws across the states, state regulatory schemes in this field must fail).


statute is the “‘ultimate touchstone’ in every preemption case.”159

Congress should be explicit in drafting the federal charter revocationlegislation that it is preempting the states because courts generallypresume that state police powers are not preempted unless Congressmakes clear its purpose to do so.160

The preemption approach enjoys several advantages over otherroutes for exercising a federal revocation power. Congress could notsimply direct the states to change their incorporation statutes to allowfor federal revocation of state-granted charters because it is unconsti-tutional for Congress to direct states to pass legislation.161 Nor couldCongress tell secretaries of state that they must revoke a charter whena federal court issues such a sentence because Congress may not directa state executive official to carry out federal law.162 Therefore, themost effective federal legislation will explicitly preempt state law inthis field.163

B. When to Revoke a Charter

Because charter revocation is the ultimate penalty a corporationcan pay—equivalent to the death penalty for a natural person—revo-cation should be exercised only for repeat offenders of the most seri-ous crimes, namely, corporations that have displayed an inability orunwillingness to respect social expectations and to respond to previ-ous criminal sanctions by ceasing to break the law. In order to pro-vide appropriate deterrence, charter revocation should be reservedonly for repeated convictions for the most serious crimes; to provideappropriate retribution, charter revocation should be reserved for se-rious crimes with a moral element. To meet the dual goals of retribu-tion and deterrence, the charter revocation statute should apply to

159 Altria Grp., Inc. v. Good, 555 U.S. 70, 76 (2008) (quoting Medtronic, Inc. v. Lohr, 518U.S. 470, 485 (1996)).

160 Id. at 77.161 New York v. United States, 505 U.S. 144, 169–70 (1992) (finding that Congress lacks

power to direct a state legislature to act and that exercise of such power would violate funda-mental principles of political accountability).

162 Printz v. United States, 521 U.S. 898, 932–33, 935 (1997).163 Although Congress could exercise its spending power by conditioning federal funds on

states passing legislation permitting federal charter revocation in a way that satisfies the four-part test of South Dakota v. Dole, 483 U.S. 203, 207–08 (1987), this approach may not be effec-tive. Even if the vast majority of states changed their incorporation statutes in order to receivethe federal funds, it would only take one state—say, Delaware, where corporate licenses alreadyprovide more than $700 million in state revenue—to reject the funds and become a “sanctuarystate” for the entire scheme to be rendered ineffective. See State Government Tax Collections,supra note 55.


corporations that satisfy a two-prong test: they experience (1) re-peated convictions of (2) serious crimes with moral content.

1. Repeated Convictions

Congress should allow courts to apply charter revocation as apresumed but discretionary penalty once the corporation has beenconvicted of two or more serious crimes (described below) within aten-year period. That is, the third conviction within a decade wouldcreate a presumption for charter revocation, though a court couldchoose to apply it for any later convictions if, for some reason, thecharter was not revoked upon the third conviction (as long as the pre-ceding ten-year period has at least two prior convictions). This pre-sumptive approach has two main advantages over a mandatory “threestrikes” approach. First, it avoids rigid application of a severe penaltyfor the inevitable marginal case. Second, a presumptive yet discre-tionary punishment has greater retributive bite than an automaticpenalty because each revocation acts as an explicit statement of soci-ety’s disapproval. For these reasons, Congress should impose a pre-sumption, but not a requirement, that federal courts impose charterrevocation for a third conviction.

Other commentators have suggested a mandatory three strikesapproach to applying charter revocation.164 This habitual offender ap-proach, which requires severe sentences for repeat convictions, fitscomfortably within the resurgence of retribution in American law andproduces a clean syllogism between penalties for natural and corpo-rate persons.165 A mandatory approach also provides certainty andavoids inconsistent application of the law. But the bizarre and argua-bly unjust results of state three strikes laws—mandatory and grosslyexcessive sentences resulting from a third conviction for a minorcrime166—are better not replicated in the corporate context.

164 Ramirez, supra note 31, at 942, 985.165 Numerous states enacted habitual offender statutes between the 1970s and 1990s that

mandated long prison terms for repeated felony convictions. See Ahmed A. White, The JuridicalStructure of Habitual Offender Laws and the Jurisprudence of Authoritarian Social Control, 37 U.TOL. L. REV. 705, 705 (2006). Notably, California adopted a strict “three strikes” approach inthe 1990s, which the Supreme Court found not to violate the Eighth Amendment’s prohibitionon cruel and unusual punishment. Ewing v. California, 538 U.S. 11, 30–31 (2003) (pluralityopinion).

166 See, e.g., Ewing, 538 U.S. at 19–20 (defendant sentenced to twenty-five years to life fortheft of golf clubs); Lockyer v. Andrade, 538 U.S. 63, 68 (2003) (defendant sentenced to twenty-five years to life for theft of videotapes).


Because the drastic consequences of charter revocation maymake judges reluctant to apply it, Congress must be explicit abouthow judges should use their discretion to apply the penalty. Congressshould make clear that, upon the third eligible conviction, charter rev-ocation is the presumed penalty. A defendant could rebut the pre-sumption by showing that the three convictions were at the lowest endof the spectrum of serious crimes described below so that charter rev-ocation would be a disproportionate penalty. Absent that showing,the court would be expected to revoke the corporation’s charter.

2. Serious Crimes with Moral Content

What crimes should make a corporation eligible for charter revo-cation? As noted above, the seriousness of the penalty suggests thatonly the most serious crimes—those that cause death, serious damageto the economy, to public health, or to the natural environment, forexample—should qualify a corporation for charter revocation.

The U.S. Sentencing Commission provides a helpful policy state-ment as to what constitutes an especially egregious offense by listingthe factors that warrant an upward departure from the sentencingrange for organizations.167 The Commission lists the risk of death orbodily injury,168 threat to national security,169 the environment170 andmarkets,171 and presence of official corruption172 as especially egre-gious to warrant an upward departure from the sentencing guidelines.To avoid reinventing the wheel, Congress should use these factors asthe foundation for the crimes to which to apply charter revocation.

To satisfy retributive goals, the penalty should be reserved forthose crimes that also have a moral dimension: that is, “deliberate ac-tions that violate core societal values.”173 For a conviction to count forcharter revocation purposes, Congress should require a showing of(1) social harm or injury, and (2) conduct that is viewed by society asimmoral.174 Many modern strict liability offenses that have been des-

167 U.S. SENTENCING GUIDELINES MANUAL §§ 8C4.2–.6 (2010).168 Id. § 8C4.2.169 Id. § 8C4.3.170 Id. § 8C4.4.171 Id. § 8C4.5.172 Id. § 8C4.6.173 Robson, supra note 33, at 124.174 Cf. Stuart P. Green, Why It’s a Crime to Tear the Tag Off a Mattress: Overcriminaliza-

tion and the Moral Content of Regulatory Offenses, 46 EMORY L.J. 1533, 1547 (1997) (proposingas an additional third prong, the presence of a culpable actor, which is satisfied for our purposesby the presence of the corporate defendant).


ignated as criminal, but do not necessarily contain the moral contentof a crime such as theft or murder, would not subject a corporation tocharter revocation. These crimes include malum prohibitum whitecollar crimes such as setting a minimum resale price in violation ofantitrust laws175 and introducing misbranded food or cosmetics intointerstate commerce.176 Charter revocation should not apply to of-fenses designated as criminal solely for deterrence purposes (becausesociety has determined them to be undesirable), but instead to of-fenses that reflect moral culpability on the part of the corporate actoras reflected in the two-part test.177

C. Why Charter Revocation?

Because the current system of federal and state criminal sanctionsfor corporations fails to satisfy two of the fundamental goals of crimi-nal law, deterrence and retribution,178 the corporate death penaltyshould be designed to meet those goals. Similarly, respecting the in-tegrity of the law by preventing a legal fiction from acting illegallymust also be a goal in crafting charter revocation legislation. Charterrevocation would clearly provide specific deterrence (deterrenceagainst future bad behavior by the convict) by ending the existence ofthat particular bad actor. Revocation would also provide far strongergeneral deterrence (deterrence against all potential criminal actorsrather than the convict alone) than current law.

Though fines and the public stigma associated with a criminalconviction may damage a corporation’s value and reputation,179 finesalmost always allow the officers and directors to continue managingthe corporation as before.180 Charter revocation, however, wouldchange the incentives for directors and particularly officers by directlythreatening their position as leaders of the corporation, and with it,their income, prestige, and perks.181 Charter revocation would pro-

175 Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373, 404–09 (1911) (findingresale price maintenance a per se violation of the Sherman Act), overruled by Leegin CreativeLeather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 888–89 (2007) (holding that vertical price re-strictions are now subject to rule of reason rather than per se illegal).

176 21 U.S.C. § 331 (2006).177 Robson, supra note 33, at 133–34. Robson uses the Federal Food, Drug, and Cosmetic

Act, which imposes criminal liability for causing the adulteration or misbranding of food orcosmetics, as an example of criminalizing regulatory offenses without moral content.

178 See supra Part II.A.179 See Ramirez, supra note 31, at 945 (noting that corporate bankruptcy or liquidation can

follow criminal conviction).180 See supra Part II.A.181 Unfortunately, because the U.S. Sentencing Commission does not provide information


vide stronger general deterrence than fines, restitution, or any otherpenalty that does not end the corporation’s existence because revoca-tion directly threatens the officers, which changes their incentives farmore than current penalties. Other penalties merely signal to share-holders that the corporation has been convicted of a crime on the di-rectors’ and officers’ watch. This is insufficient to create corporatechange because shareholders may lack the power or incentive to re-place these officers and directors.182 Rather than merely provide apotential incentive to shareholders to replace officers or directors, ascurrent penalties do, charter revocation would directly and inevitablyput them out of work, providing stronger general deterrence againstserious corporate crime. Adding charter revocation as a punishmentfor corporate crime would encourage directors and officers to policecorporate behavior and to ensure compliance with the law, thus pro-viding general deterrence against corporate criminality.

Additionally, revocation would emphatically meet the retributivegoals of punishment. Because the death penalty is the ultimate retrib-utive punishment,183 when viewed as a corporate “death penalty,”charter revocation would express society’s moral condemnation as noother penalty could. By ending a corporation’s legal existence, put-ting its directors and officers out of work, and selling off its assets,revocation would express that the corporation’s actions were so mor-ally blameworthy that in order for society’s values to be vindicated,the actor should be extinguished.

Direct charter revocation is a better solution than modifying thecurrent “divestiture of assets” provision in the U.S. Sentencing Guide-lines.184 Under section 8C1.1 of the Organizational Sentencing Guide-lines, the “corporate death penalty” operates by fining thecorporation an amount equal to its net assets.185 This is arguably asocially inefficient method of ending a corporation’s existence, as ittakes the organization’s assets out of productive use through forfei-

on convicted corporations, making a comparison of directors’ and officers’ status before andafter conviction can be very difficult. It seems reasonable to assume, however, that given thefairly small average fines described in Part I, corporations and the directors and officers that leadthem are generally left similarly situated after conviction. See, e.g., CORPORATE FRAUD TASK

FORCE, supra note 12, at 1.3–.4 (describing deferred prosecution agreement of PNC in whichhuge fines were levied without admissions of wrongdoing by corporation or individuals).

182 For a general discussion of shareholder passivity, see, for example, Dalia Tsuk Mitchell,The End of Corporate Law, 44 WAKE FOREST L. REV. 703, 706, 724–25 (2009).

183 Jack P. Gibbs, The Death Penalty, Retribution and Penal Policy, 69 J. CRIM. L. & CRIMI-

NOLOGY 291, 298 (1978).184 U.S. SENTENCING GUIDELINES MANUAL § 8C1.1 (2010).185 Id.


ture to the government.186 Charter revocation would also eliminatethe uncertainty caused by attempting to set fine levels such that all ofthe corporation’s assets are divested and the corporation is forced todissolve. Because the condemned corporation’s assets would be auc-tioned off and remain in use, charter revocation would minimize dis-ruption to the economy and to innocent parties, at least comparedwith forfeiting them to the government as under section 8C1.1.187

Prosecutors and judges may be rightly reluctant to request and apply acorporate death penalty that closes facilities and puts innocent work-ers out of a job. This Note’s proposed charter revocation penaltywould allow courts to apply charter revocation to larger corporationswith fewer concerns about the economic impact than under the cur-rent divestiture of assets regime.

D. Winding Down Corporations that Are Dechartered

As described in Part III, when a corporation is “executed,” everyeffort should be made to ensure that its assets remain in productiveuse and that damage to innocent parties is minimized. A new legalmechanism for “executing” a corporation is needed to protect inno-cent parties and to ensure that judges and prosecutors are comfortablewith its use.188 The goal of the charter revocation penalty is to detercrime and provide retribution against corporate criminals, but the po-tential collateral economic impact of dissolving a corporation, espe-cially a large one, is obvious. Thus, the mechanics of winding down adechartered corporation are critical. The dissolution of the corpora-tion should impose the harshest penalty on the corporate entity itself,directors, and officers, while only damaging shareholders—who haveless control over corporate misconduct—to the extent necessary to in-centivize them to take an interest in the corporation’s criminal mis-conduct. Meanwhile, for courts to feel comfortable imposing charterrevocation, and to ensure public support for its use, the penalty shoulddissolve the corporation with as little impact on innocent parties—

186 Id.

187 See Ramirez, supra note 31, at 975.

188 The effects of the proposed charter revocation penalty would likely be no worse forinnocent parties than divestiture under the antitrust laws, an area in which the federal courtshave substantial experience. Courts have ordered antitrust violators to divest some or all oftheir assets for decades, recognizing divestiture as “the most important of antitrust remedies.”United States v. E.I. du Pont de Nemours & Co., 366 U.S. 316, 330–31 (1961). The federalcourts’ experience and comfort with divestiture in the antitrust context should ease fears aboutthe application of the corporate charter revocation penalty.


employees, consumers, suppliers, and the larger economy—aspossible.

The case for punishing directors and officers (by causing them tolose their jobs and the perks of corporate leadership, along with in-flicting the stigma of having led an “executed” corporation) is basedon the directors’ and officers’ responsibility for leading the corpora-tion at the time the crime at issue (or, potentially, the most recentcrime) was committed. The directors and officers are not only thosewho determine how the corporation will operate, including whether itwill obey the law, but also are the dominant influence on the internalcorporate “culture.”189 Thus, the winding down of the corporationneed not take an interest in the fates of directors and officers, whoshould be rendered unemployed by the charter’s revocation.

The owners of the corporation—the shareholders—should bedamaged but not wiped out: they should receive a share of the postdis-solution proceeds from the sale of the corporation’s assets (describedbelow). Though shareholders in publicly held corporations are obvi-ously removed from management of the corporation,190 charter revo-cation should still damage shareholders to ensure that they have astrong enough incentive to influence management to prevent corpo-rate crime.191 Both the problem of distinguishing an innocent share-holder from a guilty one, and the loss of incentive to shareholders topolice the corporation that occurs when they are protected duringcharter revocation, counsel against protecting shareholders. In short,shareholders should have some “skin in the game,” though less thandirectors and officers, to ensure that whatever control or influencethey exercise can be used to prevent criminal activity.

When a corporation is dechartered, its assets and employeesshould remain as undisturbed as possible in the wider economy. Todo this, a corporate dissolution “czar” should be appointed by thecourt to manage the sale of the corporation’s assets.192 If a corpora-

189 Ramirez, supra note 31, at 965 (explaining that the ethical leadership within organiza-tions appears to have a strong impact on legal compliance).

190 Voluminous literature exists on how much control shareholders, as nominal “owners” ofa corporation, exercise as opposed to management, which actually controls the corporation. See,e.g., Mitchell, supra note 182, at 706–07.

191 But see Ramirez, supra note 31, at 975 (suggesting that “innocent” shareholders shouldbe protected during the dissolution of a corporation). Though public opposition to dissolution ofa widely held corporation like BP could be intense, prosecutors and courts would have othercountervailing incentives to impose charter revocation.

192 One commentator proposes the creation of a similar temporary position to oversee dis-solution but labels it a “trustee.” Ramirez, supra note 31, at 974.


tion appeals its sentence, a temporary injunction would allow the cor-poration to continue operating its business normally but wouldprevent its officers and directors from siphoning the corporation’s re-sources elsewhere. The czar should be experienced in the corpora-tion’s line of business and understand the corporation’s upstream anddownstream relationships. The czar would be authorized to hire staff,paid for by the corporation.

The charter revocation statute should require that the czar keepcorporate assets in productive units whenever possible so as to mini-mize the impact on the corporation’s employees and the larger econ-omy. This would be easy for small corporations because thecorporation’s entire assets would likely be sold intact to a singlebuyer. For larger corporations in diverse lines of work, this could bemore complicated, requiring the czar to determine how to break upthe corporation’s assets to prepare them for sale. The czar should, forexample, sell a condemned corporation’s oil refinery and associateddistribution infrastructure intact rather than selling the componentsindividually. The czar would not be required to sell the assets at auc-tion, but auction sale would enjoy a presumption under the statute.

The statute should specify that revenues from the sale of the cor-poration’s assets first pay court costs and the costs of the czar’s opera-tion during dissolution. Next, nonmanagement employees of thecorporation that have clearly suffered harm due to the dissolution,such as being rendered unemployed, should be compensated througha one-time stipend. Finally, the balance should be distributed amongthe shareholders. In this way, the affairs of the corporation could bewrapped up in an orderly and just way that would protect innocentparties while only causing minimal harm to shareholders.

E. Example of Appropriate Charter Revocation

BP-NA provides a useful example of how the new federal charterrevocation penalty could be implemented. Had the corporate deathpenalty been in place, BP’s officers and directors would have had a farstronger incentive to avoid the set of calamities leading up to the 2010oil spill. Under the proposed statutory scheme, after the repeated fed-eral convictions for serious morally-laden crimes that have killedworkers, destroyed small businesses, and polluted the environment, afederal prosecutor could request charter revocation for the corpora-tion. If BP were convicted, the federal trial court could exercise thepower granted to it by Congress by issuing an order preventing anystate from reissuing a corporate charter to BP-NA and any other do-


mestic BP subsidiary. After the inevitable appeals are exhausted, theczar appointed by the trial court would take an inventory of BP’s as-sets and determine how to break up the refineries, oil fields, and pipe-lines so as to facilitate their sale and continued productive use.

After selling BP’s assets and paying the czar’s expenses, the re-sources would be distributed to laid-off workers and then to share-holders. With the process concluded, the public’s need for retributionagainst a serial bad actor would be satisfied, a chronic outlaw wouldbe removed from society, and other corporations would be on noticethat breaking serious rules has drastic consequences. This is just oneexample of how a federal corporate charter revocation penalty wouldimprove the administration of justice.

CONCLUSION

The current system of criminal sanctions for corporations fails toprovide adequate deterrence or retribution. This problem stems inlarge part from the fact that states charter corporations, but the fed-eral government usually criminally sanctions them. The current sys-tem of corporate criminal sanctions is based primarily on fines anddoes not adequately meet either goal.

A federal corporate death penalty provides stronger deterrenceand retribution against corporate criminals. Congress should author-ize such a penalty for corporations that receive three or more convic-tions for serious crimes that demonstrate moral culpability. Congresscould create the federal charter revocation penalty by exercising itspreemption power and requiring that no state regrant a corporatecharter to a convicted corporation. Such a penalty would dissolve thecorporation and wipe out management while inflicting minimal harmon shareholders and even less harm on employees. The result wouldbe a substantial increase in both deterrence and retribution of corpo-rate crime.

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